For more than 100 years, we have bought our cars at independent dealerships. That’s because state franchise laws prohibit auto makers from selling their cars directly to us consumers. This arrangement worked out well for dealers over time. But the competitive landscape is changing. In the dawning Electric Age, new market players and technologies are beginning to challenge today’s retail model and its bottom line.
Rather than sell through franchised dealerships, electric-car companies and EV startups such as Tesla, Rivian, Lucid and Polestar follow a direct-to-consumer model, building their own retail studio and service footprint. Cars are sold online only, which greatly simplifies the buying process. Prices are set centrally, with no room to haggle. This business concept cuts out “the middleman” and allows manufacturers to control the entire customer journey – from purchase to delivery, maintenance and ownership. Auto makers now have complete say in how their brand and their vehicles are presented…and serviced. Wouldn’t you prefer to have your car looked at on your driveway or at work? It’s already happening, thanks to a fleet of mobile service units for maintenance and repairs.
Direct-to-consumer model vs. dealerships
Tesla, which spearheaded the direct auto sales model in America, already owns more than 160 stores and galleries in the United States. EV startups Rivian and Lucid are expanding their bricks-and-mortar presence, with Rivian to open 10 ‘retail experience’ centers and 41 service facilities by next year, while Lucid plans for 20 studio and service locations. Polestar, the new electric-only car brand owned by Volvo, is opening another 15 new showrooms by end of this year.
There are bumps in the road ahead for auto dealers. Upgrading dealerships to service electric cars is expensive. Installing charging stations, heavy-duty lifts and dedicated service bays, and retraining technicians to work safely on high-voltage electric systems requires investments of several hundred thousand dollars.
Unlike their gas-guzzling counterparts, electric cars hardly classify as ‘cash cows’ in terms of service. With fewer components, they require less maintenance than conventional cars: an electric drive train has one-tenth of the moving parts of an internal combustion engine. Electric cars don’t have spark plugs or catalytic converters. They don’t need mufflers, fuel filters or fan belts. Adieu to oil changes…and to the revenue streams dealers were used to in the good old days, when on average 50 percent of dealership gross profits came from parts and service.
Over-the-air-updates
Here’s yet another threat to dealer profitability: over-the-air updates. Pioneered and perfected by Tesla, this wireless delivery of software ‘refreshes’ your auto’s systems – from suspension to brakes, range and infotainment – overnight and while the car is in your garage. No need to drive to the dealership for that two-day update via cable.
Stress-testing the current profit model
Ever thought about the collision avoidance system in your car, designed to keep you and your loved ones safe? Deployed in large numbers, this technology will eventually help reduce the number of accidents and put a dent in the lucrative high-margin collision repair business of dealers.
There’s no doubt these developments are ‘stress-testing’ the current dealership revenue and profit model. It’s time for established auto makers and their dealers to rethink the future of retail.
We’ll be back…in the meantime, stay safe and charged!
-Christian Koenig