Are US Car Dealers Ready for Tomorrow?

Chip shortages and pandemic factory lockdowns have dominated headlines in the automotive industry around the world for several turbulent years. Less noticed has been a wave of disruption that is transforming another part of the industry—the retail sector. The impact of this disruption will be felt throughout the automotive ecosystem.

Chronic supply shortages of new vehicles, the transition from internal combustion engines (ICEs) to electric vehicles (EVs), and the emergence of new digital retail business models are all radically changing the ways vehicles are being brought to market. Moreover, they are occurring at a time of mounting concerns that much of the global economy may be heading into recession.

The implications are enormous for brick-and-mortar dealerships. Business models that have traditionally revolved around having ample stocks of cars on their lots and conducting business primarily in physical showrooms will have to adapt to supply scarcity. Companies will have to begin engaging with car buyers online. And because EVs require fewer repairs and less servicing, dealers will also have to develop new revenue streams. Dealerships that learn to skillfully navigate this new go-to-market landscape will emerge as the winners in the years ahead.

Our research found that US dealers are confident they will successfully navigate this transformation. They believe that brick-and mortar dealerships will remain the primary channels for purchasing vehicles. They also believe that neither new EV OEMs nor digital marketplaces selling directly to consumers will pose serious competitive threats or undermine their business models.

We also found, however, that many US dealers may not be adequately preparing for the challenges ahead. They are taking some steps in the right direction, such as by building new digital capabilities to engage with customers outside of showrooms and investing in training and new equipment to support EVs. But dealers are underestimating the speed of the transition to EVs. And many aren’t making the really big digital push needed to successfully compete with the new players.

The Supply Crunch and Inflation Will Linger

To get a sense of how structural changes in automotive retail are playing out around the world, Boston Consulting Group conducted research in major markets during the past year. This article focuses on the US, but the trends we observed, and their implications, are similar in other markets.

In addition to their skepticism over EV adoption, dealers cited several reasons for their lack of concern. Many noted that they will also be selling EVs: traditional OEMs are making the shift from ICEs and are selling EVs through their traditional channels. (In the US, most states require traditional OEMs to sell through their existing dealers, while new EV OEMs, such as Tesla, are able to sell directly to consumers in many states.) Dealers also observed that pure-play EV companies have limited geographic reach, particularly in rural areas, where many consumers worry about the driving ranges of battery-powered vehicles.

Embracing Digital Retail

Digital commerce has also been silently transforming auto retail. Only around 0.5% of new car sales in the US were transacted fully online in 2020. But if automotive e-commerce follows an adoption curve similar to that of other consumer durables, such as appliances and furniture, online sales transactions will likely reach 11% to 17% by 2030 and 21% to 33% by 2035.

Although the entire auto purchase process may be slow to move online, digital channels are already playing a critical role. A BCG survey of US consumers found that more than 80% of car buyers do research online before visiting a dealership. They turn to traditional offline information sources—such as family and friends and specialty magazines—much less frequently than they used to. The typical buyer also visits fewer dealerships before making a purchase—just 1.4 on average, compared with nearly 4 just a few years ago. Buyers are more informed and know the vehicle specifications they want before going to a dealership. This is particularly true for EV buyers.

Dealers are expanding their digital capabilities in response to this shift in consumer behavior. Ninety-two percent reported that they have improved at least one digital offering. Around three-quarters now enable buyers to book online for the home delivery of the vehicles they purchase, for example, and provide better vehicle descriptions and imagery on their websites. (See Exhibits 7 through 9 in the carousel below.)

OEMs are stepping in as well, introducing digital services that enable customers to make fewer or shorter visits to dealerships. Genesis, the luxury arm of Hyundai, has launched the Genesis Concierge service, for instance; Ford has launched FordPass App; and Nissan offers Nissan@Home. Among other things, such services offer home delivery of cars for test drives, the ability to buy vehicles from home, online maintenance scheduling, and loyalty programs.

Dealerships also face growing competition from digital dealers, such as Carvana and Vroom, that sell directly to consumers. But 88% of US dealers said that they don’t consider digital retailers a competitive threat, either imminently or in the medium term. They may have a point: as digital leaders gain scale, several of them have been beset by falling profit margins, consumer complaints, and administrative snags, such as long delays in processing titles and registrations. They have also struggled to gain access to inventory—a challenge that prompted Carvana to acquire the auto auction company ADESA. Financial markets have also turned negative: while the stocks of listed dealership chains, such as Penske and AutoNation.com, have significantly outpaced the S&P 500 Index since late 2020, the shares of listed digital retailers have underperformed.

The digital offerings of brick-and-mortar dealers are still far from the end-to-end customer experience offered by online digital retailers. But we are starting to see dealers strengthen their digital reach by forging partnerships with online marketplaces and technology providers. GM has introduced CarBravo, an online platform with an expansive inventory of used vehicles both from dealerships and a national central stock. CarGurus’ Digital Deal enables dealers to sell more vehicles by providing access to online shoppers through its retail platform. The car retail platform Roadster, which was acquired in 2021 by CDK Global, is one of the growing number of companies providing a digital retail experience for brick-and-mortar dealers.

By supplementing the traditional strengths of brick-and-mortar dealerships, such partnerships help create “enabled” dealers that should become very competitive with digital dealers. According to our analysis, digitally enabled brick-and-mortar dealerships have an advantage over their purely digital counterparts in terms of customer acquisition, the selection and value they offer customers, and distribution. Digitally enabled dealers can also provide an omnichannel experience that allows customers to shop at the showroom, online, or both.

Despite the many forces of disruption roiling the industry, most US dealers foresee the brick-and-mortar showroom remaining the cornerstone of light-vehicle retail. Sixty-two percent told us that they doubt the role of physical dealerships will drastically change over the long term. Most consumers seem to agree. Eighty-one percent of recent car buyers surveyed said that they still prefer going to a dealer to see, touch, hear, and drive vehicles before buying them. A majority of consumers also indicated an unwillingness to make such expensive purchases online and believe they would be unable to get all the information they need to make a decision.

The Implications for Players in Auto Retail

The emerging automotive retail environment has different implications for various players in the ecosystem. We see the following imperatives for success:

• Dealers. To succeed in the digital age, dealerships need compelling omnichannel offerings that combine online showrooms with their brick-and-mortar counterparts. Dealers should build win-win partnerships with e-commerce marketplaces. They should reduce friction along the customer journey—such as paperwork required for registration, negotiations over financing, and the process for trade-ins—prior to handing over the keys. Dealerships should also look to monetize their service loaner fleets, such as by introducing subscription business models or short-term rentals.
• Digital Marketplaces and Solution Providers. Rather than view conventional dealerships as competitors, digital players should look for opportunities to strengthen their relationships with them by enabling dealers to leverage their online experience to create customer value. They should also scale up their own solutions for acquiring inventory, such as with consumer-to-dealer or dealer-to-dealer transaction platforms. Digital players can also provide transaction analytics and other market-intelligence services.
• OEMs. Automakers should double down on programs designed to prepare dealers for the transition from ICEs to EVs. They should rethink their approaches to dealer profit margins and bonus programs, especially as the build-to-order trend grows and maintenance and servicing revenue change. OEMs should collaborate with dealers to help create seamless customer journeys that combine online with offline engagement and consider new ways to manage and monetize inventories of off-lease vehicles.

The COVID-19 pandemic altered the way people work and buy daily necessities. In much the same way, stock shortages, the rise of digital dealers, and the transition to EVs are transforming how cars are bought and sold. The winners in the auto retail landscape of the future will be the dealers, online marketplaces, and OEMs that best combine the traditional advantages of the showroom with innovative digital solutions to create a seamless customer experience.