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New Study Outlines Keys to Improving Dealership Performance in the Digital Age

April 1, 2015

NEW YORK — Dealer profitability, on average, could reach levels of today’s top quartile performing dealers if both carmakers and dealers make the necessary investments to achieve operation excellence and streamline marketing expenses, according to a new study released this week at the 2015 National Automobile Dealers Association/J.D. Power Automotive Forum

Conducted by McKinsey & Co. in cooperation with the NADA, the study, “Fast Forward: How U.S. Auto Dealers Can Drive Sustainable Economic Performance in the Digital Age,” found that U.S. new-car dealers have tremendous opportunities to expand their businesses and improve profitability despite challenges to current retailing models.

“A top industry priority should involve encouraging and creating high-performing auto dealerships,” said Stefan Knupfer, a senior partner with the firm’s Automotive & Assembly Practice. “Our research busts the myth that most of the factors that effectively drive dealer success, such as sufficient scale and brand strength, remain beyond the industry’s control. Instead, we discovered that internal operating practices differentiate highly-profitable retailers from their peers today even more than in 2006 when NADA and McKinsey conducted a similar analysis.”

The research shows that while dealerships are still the preferred place for making the final buying decision, today’s car shoppers are spending more time online on dealer and third-party websites to kick the digital tires of cars and light trucks. Simultaneously, new players with other business models are entering the retail automotive space with an eye toward profiting from sales and service revenue.

“More than 16.4 million new cars and light trucks were sold last year, but this recovery in sales has not translated to consistently increasing profits,” said Robert Mathis, a partner within the firm’s Automotive & Assembly Practice. “While profits have risen from post-recession lows, they have plateaued over the last two years and have failed to keep pace with growing volumes.”

The study included surveys of more than 750 new-car dealers, analysis of more than 2,000 dealer financial metrics, as well as consumer research conducted by McKinsey & Company last year. The main conclusion was that in order for dealers to attract digital car buyers, they need to collaborate with automakers more to achieve better returns on their marketing dollars and improve customer satisfaction.

“While dealership profits are under attack from multiple fronts, such as Internet-based third parties and the hyper-competitive nature of auto retailing,” noted Steven Szakaly, NADA chief economist, “this study provides a guide for how dealers and car manufacturers can work together to improve business performance and increase customer satisfaction.”

 

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