A recent survey by Kerrigan Advisors found an upbeat view of the auto retail industry in the coming years in regards to the franchise system, dealer profitability and electric vehicle (EV) sales.
Overall takeaways include OEM executives have a largely positive outlook regarding the health of the auto retail industry, expecting auto retail earnings to normalize at higher levels as new vehicle sales rebound and new vehicle gross margins remain above pre-pandemic levels.
Additionally, respondents opined the transition to EVs will be much slower than originally projected and that OEMs are preparing necessary contingency plans for increased internal combustion engine (ICE) production to meet consumer demand and the U.S. auto market reality.
Erin Kerrigan, founder and managing director of Kerrigan Advisors, stated the second annual survey of OEM executives provides a critical window into their unique perspectives of the automotive industry.
“The survey offers a candid, on-the-ground view of auto retail’s opportunities and challenges in the near and medium term,” said Kerrigan in a press statement with the report’s release. “The results underscore the continuing evolution of the auto retail marketplace, particularly regarding the demand challenges associated with EVs.”
The data for the Kerrigan OEM Survey was gathered from the annual survey of automotive OEM executives in conjunction with the issuance of The Blue Sky Report. The survey, based on over 110 responses from those in Kerrigan Advisors’ proprietary database, was conducted from December 2023 to June 2024.
While 54 percent of OEM executive expect dealership profitability to decline in the next 12 months, that is an improvement from last year when 69 percent of respondents expected a decline. And 41 percent of executives expect profits to remain the same over the next 12 months, up from just 24 percent from a year ago.
As with 2023, a slim minority project dealership earnings to increase in the near-term. These results indicate auto retail profits are beginning to normalize for many franchises.
Of the executives surveyed, 38 percent believe new vehicle gross margins will return to pre-pandemic levels, while 62 percent project margins will normalize above 2019 levels—ranging from 50 percent to over 150 percent above 2019 levels.
As for sales, 44 percent of those surveyed executives expect new vehicle sales to increase over the next 12 months, while 48 percent project sales will remain at 2023’s levels. Just eight percent expect a decline in sales over the next 12 months despite economic headwinds in the U.S.
“We are in the midst of auto retail’s great normalization,” stated Kerrigan. “After years of historically high dealership profits, new vehicle inventories are rebounding and gross profit margins are on the decline. We are pleased to see the majority of OEM executives do not expect a return to pre-pandemic gross profit margins.”
Higher projected sales are likely a byproduct of rising new vehicle inventory expectations, according to Kerrigan officials. Over the next 12 months, OEM executives surveyed project higher inventory levels, including 70 percent supply of new vehicles to normalize at 60-90 days, up from 38 percent in 2023. Just 22 percent of respondents project days’ supply to remain within 30-60 days in the next 12 months, down from 59 percent in 2023.
Authors of the survey highlighted a nearly threefold increase in OEM executives who believe days’ supply will reach 90+ days in the next 12 months. Notably, as of June 2024, industry days’ supply of new vehicles was 76 days, squarely in the expectations of the majority.
As for the issue of EVs, 64 percent of OEMs queried stated they will not meet their proposed EV sales goals and 81 percent believe the transition to EVs will be slower than originally planned. Relatedly, 86 percent reported they are developing contingency ICE production plans if EVs do not penetrate the market as expected.
In the eyes of OEM executives, high vehicle prices as the reason EV sales are struggling in the U.S.–39 percent. Kerrigan officials noted the price issue may soon be a non-factor as new EV prices have declined 16 percent through June 2024 from their peak two tears ago and are beginning to approach price parity with ICE vehicles.
But dealership executives note the lack of a prolific and dependable charging infrastructure (31 percent) remaining a significant hurdle to EV adoption throughout the U.S. as well as weak consumer demand (30 percent).
The failure to meet projected EV sales goals has resulted in some significant changes in OEM expectations of dealers. Fifty seven percent of respondents do not expect the agency model to be introduced in the next five years, exemplified by Ford abandoning their plans to take a more active role in retailing. Many now recognize the dealer network is the most economic and efficient sales model for the OEM, according to Kerrigan officials.
The decline in EV sales expectations has resulted in a shift in OEM projections related to dealership facility requirements. Whereas in 2023 32 percent of respondents projected an increase in facility requirements over the next five years, only 18 percent expect an increase while 60 percent believe facility requirements will remain the same. Twenty two percent see a decline in requirements, perhaps as EV charging infrastructure investments become a less critical OEM priority.
While OEMs are more supportive of the legacy sales model, a rising number expect to take a leading role in the customer relationship and data ownership. The majority of respondents project the customer relationship and data will be shared by OEMs and dealers in the future, though 19 percent believe the OEM will exclusively own the customer relationship and data.
Just 14 percent of respondents project the legacy model, in which the dealer is the primary owner of the customer relationship, will remain.
“It is interesting to see that most OEMs are making contingency plans for increased ICE production and admitting their EV sales projections will not be met,” said Kerrigan. “Even with the EV miscalculations, we are pleased to see that executives have a largely positive outlook on the auto retail industry, expecting rebounding new vehicle sales and gross margins to remain above pre-pandemic levels for the foreseeable future.”
Kerrigan Advisors is the leading sell-side advisor and thought partner to auto dealers nationwide. Since its founding in 2014, the firm has led the industry with the sale of over 280 dealerships representing $9 billion in client proceeds, including the third largest transaction in auto retail history – the sale of Jim Koons Automotive Companies to Asbury Automotive Group. The firm advises the industry’s leading dealership groups, enhancing value through the lifecycle of growing, operating and, when the time is right, selling their businesses. Led by a team of veteran industry experts with backgrounds in investment banking, private equity, accounting, finance and real estate, Kerrigan Advisors does not take listings, rather they develop a customized sales approach for each client to achieve their personal and financial goals. In addition to the firm’s sell-side advisory services, Kerrigan Advisors also provides a suite of consulting and investor services including growth strategy, market valuation assessments, capital allocation, transactional due diligence, open point proposals, operational improvement and real estate due diligence.
Kerrigan Advisors monitors conditions in the buy/sell market and publishes an in-depth analysis each quarter in The Blue Sky Report®, which includes Kerrigan Advisors’ signature blue sky charts, multiples, and analysis for each franchise in the luxury and non-luxury segments. To download a preview of the report, click here. The firm also releases monthly The Kerrigan Index™ composed of the seven publicly traded auto retail companies with operations focused on the US market. The Kerrigan Auto Retail Index is designed to track dealership valuation trends, while also providing key insights into factors influencing auto retail. To access The Kerrigan Index™, click here. To read the 2023 Kerrigan Dealer Survey, click here. To read the 2024 Kerrigan OEM Survey, click here. Kerrigan Advisors also is the co-author of NADA’s Guide to Buying and Selling a Dealership.
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