A successful dealership depends on three legs

There have been a number of occasions over the last few weeks when I have in some way had to consider how the many changes that we are seeing in the industry will affect the dealer business model.  Whilst the main focus of manufacturers and many commentators is on the new car sales business, and this does represent the majority of sales revenue under the current franchise model, the reality is that most of the profit comes from used cars and aftersales.  The most successful dealerships run a balanced business, where each of these activities (and the related F&I income) make a positive contribution to the bottom line.  Together, they can result in a profitability which is two or three percentage points – sometimes more – above the network average for the relevant market and brand.  It also provides resilience in the face of downturns in any one area – such as we see now as the result of chip shortages affecting new car availability, the related tightness in used car supply or the longer term decline in aftersales work due to electrification.

This integrated business model has been at the core of dealership economics for decades, but also supports customer retention at dealership level as aftersales customers can be drawn back into the car purchase cycle, and used car customers traded up into new cars.  A purist might argue that a business should not be reliant on cross-subsidies, and that each business should be self-sufficient, but if truly separated this would result in needless duplication of facilities and personnel, and the loss of the ongoing customer relationship.

Beyond the short term issues of having cars to sell, there are some structural changes that potentially affect this integrated business model, and manufacturers in particular seem to be ignoring the knock-on effect on dealers of changes that they are proposing or implementing.  That is not to say that the changes themselves are wrong, but the business case for the dealers needs to take into account the total effect, and this in turn may lead to the need for adjustments to the original proposal.

Agency is the most prominent example today, where the new car sales are contracted directly by the manufacturer, but are likely to include F&I and service plans, and may result in changes in the related used car opportunity for the dealer.  Some manufacturers are also proposing that agency is extended to used cars, particularly in the case of BEVs, which would result in one of the most entrepreneurial activities of a dealer being transformed into a fixed commission model, again with the bundled F&I and service plan.  In parallel to this, we also see the general extension of leasing and service plans, driving a larger part of the parc – particularly for cars up to 6-8 years old – into managed aftersales.  Whilst higher retention levels are welcomed, the discount on labour and parts that is typically applied, and some loss of discretionary work, both negatively affect the dealer financials.

I am not suggesting that dealers and dealer networks are like some classic cars that need to be preserved in their original form.  They need to adapt as much – possibly more than – the manufacturers themselves.  But they fulfil a critical role today in handling the majority of the routine customer interaction, and I do not see a better alternative in the future.  A newcomer would have more to learn than the incumbents need to forget.  However, manufacturers need to ensure that there is still a viable future for the partners they want to retain, and recognise that they will still require all three legs on the stool.