The Growing Dealership Dilemma:
Get Big or Get Out

A whirlpool of uncertainty is challenging today’s automotive industry – and dealerships are being pulled into the vortex, looking for a way forward in an environment where no easy answers exist. Dealers are being pressured with having to invest in upgrades for the EV future, merge with or acquire other dealerships, or sell their dealerships and move on.

Banking on experience and institutional knowledge can’t be counted on when the future of automotive dealerships will be, in many instances, a significant departure from the successful business models of the past. Knowing how to proceed is suddenly layered in unprecedented complexity, with scientific analysis taking center stage.

Three Pressure Points Driving the Decision-Making Process

Among the many pressure points dealerships of all sizes are challenged with confronting, three stand out: online process, consumer preference and manufacturer policy.

Online process. There has been a significant side effect of the pandemic in terms of the process of buying a new vehicle, with the result being an accelerated adoption of digital retail. Inventory shortages also helped motivate the move to online shopping and buying. Furthermore, a recent survey by Progressive insurance¹ found that online car buyers are 20% more likely to report being highly satisfied with their experience than in-person buyers.

Momentum for online sales is building². In fact, 74% of global automotive executives believe 40% of new vehicles will be sold directly to the consumers online. And consumers are beginning to expect online options, too – 60% expect dealerships to have fully online purchasing available.

Consumer preference. Auto buyers are beginning to question dealer relevance in the vehicle-buying process. In fact, in a recent Harris Poll³ study commissioned by Urban Science, it was found that auto buyers are not completely convinced today’s dealers are relevant…or putting in the effort to become so.

This is especially true when consumers were asked about dealership preparedness for the electric future. In this regard, the poll showed a significant gap between what auto buyers believe about dealership readiness for the future (30%), compared to what dealers believe about their own dealership readiness (50%).

Manufacturer policy. With the pressure to convert dealerships to be “EV ready,” OEMs are increasingly requiring dealers to invest or sell. The costs for dealerships to become EV compliant are significant and vary by manufacturer. They are, not surprisingly, especially burdensome to smaller dealerships or dealership groups in smaller metro or rural areas⁴. Ford, for example, is asking its nearly 3,000 dealers to invest upwards of one million dollars for upgrades to sell all-electric vehicles⁵.

New Laws and Bills: A Fourth Factor that May be the Tipping Point

There’s another factor complicating the buy/sell equation for dealers: new government regulations – even for regulations that, originally, didn’t apply to auto dealerships. One such regulation is the Gramm-Leach-Bliley Act, which was originally put in place by the Federal Trade Commission to ensure that banks and other financial institutions would have technology and procedures to protect their customers’ financial data from cyberattacks and breaches. The FTC, however, then extended this safeguards rule to non-bank financial institutions, including automobile dealerships.

The new rule took effect on January 10, 2022, with the FTC giving dealers up to one year to update processes and comply. Small dealerships, in particular, may feel unduly burdened by the rule, since many of those dealerships don’t have the technical people they need on staff – and the fines are stiff. Dealerships that fail to comply could see minimum fines of $100,000 per compliance breach…and the deadline to comply is now less than four months away.

The FTC-proposed Motor Vehicle Dealers Trade Regulation Rule adds another layer of challenges of dealerships of all sizes. Although the goal of the rule is to make the car-buying process more clear and competitive, the implications carry critical operational and compliance risks for dealers.

The proposed rule, however, may cause confusion for both the consumers it seeks to protect, and the dealers tasked with following it. For example, disclosures relating to advertising and cost that are required under the proposed rule overlap with, and at times are inconsistent with, the requirements of the Truth in Lending Act.

Furthermore, in today’s culture of transparency, dealers need to be extra vigilant. It’s not only the cost of the fines that’s at stake, but also a dealership’s reputation and the potential erosion of long-term customer loyalty for those who break the rules – intentionally or not.

1. “Consumers Embrace Online Car Buying,”
https://www.progressive.com

2. “2021 Year End Kerrigan Advisors Blue Sky Report”

3. Conducted online by The Harris Poll on behalf of Urban Science, the auto-buying public survey was conducted from DATE, to DATE. Data are weighted where necessary by age, gender, race/ethnicity, region, education, marital status, household size, employment, and household income and propensity to be online to bring them in line with their actual proportions in the population.

4. “GM to Offer Buyouts to U.S. Buick Dealers as it Moves to Make Brand Electric,”
https://www.washingtonpost.com

5. “Ford Asks Dealers to Invest in EVs as it Chases Tesla-Like Profit,”
https://www.cnbc.com

6. “U.S. Auto Dealers’ Attention Turns to Inflation, High Costs and Inventory,”
https://www.autosuccessonline.com

7. “2021 Year End Kerrigan Advisors Blue Sky Report”

8. “Record Number of Buy/Sell Transactions,”
Kerrigan Advisors’ Blue-Sky Report