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Fox Motor Group’s new 50,000-square-foot flagship Subaru store in Cascade Township includes a lounge, fireplace and living wall, among other amenities. Fox Motor Group’s new 50,000-square-foot flagship Subaru store in Cascade Township includes a lounge, fireplace and living wall, among other amenities. COURTESY PHOTO

Persistent inventory constraints, shifting EV sales model could change dealership format

BY Sunday, August 14, 2022 10:00am

Anewly built flagship Subaru store that Fox Motor Group LLC opened in Cascade Township simultaneously demonstrates the latest in new dealership technology and what could become a fading part of the automotive retail industry. 

The gleaming 50,000-square-foot store reportedly takes the crown as the largest Subaru dealership in the country, featuring 22 service bays, six express service lanes, two tire change hoists, a pair of EV service lanes and an alignment rack. 

Designed by Ghafari Associates Inc. and built by Walker-based Triangle Associates Inc., the store also includes a range of customer-centric amenities and features, including a lounge, fireplace and living wall. Fitting with the Subaru brand, Fox expects later this year to open an indoor dog park, complete with a water fountain, benches and an agility course. 

“They wanted to provide the best dealership experience with the best amenities, including workspaces and soft seating areas with video games and TVs,” said Mitch Watt, senior vice president and principal of Triangle Associates. 

While the new facility shows off the latest in store design for the Subaru brand and Fox Motors, it’s also firmly rooted in the dealership industry of the past, with parking space outside for an inventory of more than 400 new and pre-owned vehicles. 

That’s likely an ambitious amount of space, at least for the foreseeable future, given that most dealership parking lots have stood largely underutilized — if not nearly vacant — over the last two years amid inventory shortages related to a global lack of semiconductor chips. 

At the same time, automakers and dealers have leveraged the lack of inventory by switching — at least temporarily — to a higher-margin sales model in which customers spec out the vehicles they want and then work through the dealership to order it.

A confluence of factors has allowed some dealers and automakers to “thrive with lower inventory,” said Mike Wall, executive director of automotive analysis at S&P Global in Grand Rapids. 

“It’s a little artificial, it’s manufactured because of the crisis, but everything has aligned so it’s been possible for them to do this,” Wall said. “They have learned that, ‘We can make decent money and have discipline on inventory.’ But it will be interesting, once we are able to produce more vehicles: Will we have the discipline to maintain this inventory strategy?”  

Considering new sales models

Beyond the immediate component shortages and lack of inventory, the automotive dealership model faces several fundamental challenges as the industry gradually shifts away from internal combustion engines to more electric vehicles. 

EV upstart Tesla and new entrants like Rivian and Lucid have gone to market with direct-to-consumer sales that do not rely on the traditional franchise brick-and-mortar dealership model. 

The model has taken root for EVs such that even legacy automakers are considering direct-to-consumer sales for their EV brands. To that end, Ford Motor Co. CEO Jim Farley told a recent investor conference that the company needs to shift to a “100 percent online” sales model with non-negotiated pricing for its EVs. 

“We think our distribution model today is about $2,000 per unit more expensive than Tesla. About a third of that is inventory. We have all this inventory sitting around in dealers, in transit, (and we’ve) got to get rid of all that,” Farley said during the Bernstein Strategic Decisions Conference, noting that public advertising also costs the company $500 to $600 per EV. 

Under Farley’s new vision for Ford, dealerships would still exist, although their model would shift to focus on servicing vehicles that customers purchased online. 

Statements like that have certainly been cause for concern among dealerships. 

“When you look at the EV situation, especially in the next couple of years, we’re going to have a raft of new vehicles, a number of new nameplates. This is part of the reason why you see the automakers consider different go-to-market or distribution strategies,” Wall said. “They’re going to have all these new nameplates in varying volumes and they’re going to want to make sure they get the models that are desired into the hands of the people that want them and not run the risk of having these stockpiles in various areas. It’s a challenge for them, it’s a challenge for the dealers. 

“It causes some concern on the dealer side. They want to make sure they’re part of the process; they don’t want to be left out. Obviously, the vast majority of the market is still buying internal combustion (vehicles), but they don’t want to be left holding the bag as the market transitions to battery electric. That’s why they want to make sure they have a seat at the table. At least thus far, the automakers understand that.”

Destination charging opportunities

Even a shift to servicing EVs poses a new challenge, given that electric motors have fewer moving parts than internal combustion engines and have a different, if not less frequent, maintenance schedule. 

Even so, Wall still thinks the dealer network has plenty of opportunities ahead. For one, EVs still have parts that wear out and have the potential to break. As well, dealers’ finance and insurance (F&I) profit center is likely to remain lucrative, particularly for products tailored to extended battery warranties. 

Wall also envisions dealerships capitalizing on new revenue streams by repurposing some of their footprint that had been dedicated to inventory to instead focus on fleet management for the growing ranks of autonomous and electric vehicles, including electrified commercial vehicles used for last-mile delivery services, for example. 

“There’s a potential for these dealers to have a lot more room to work with if they don’t need as much parking lot,” Wall said. 

Likewise, the dealer network also poses some opportunities for automakers to build out their charging infrastructure. Unlike EV companies such as Tesla that lack a brick-and-mortar presence and have to build their infrastructure from scratch, legacy automakers already have physical locations. 

The legacy automakers and their dealerships “haven’t even scratched the surface” in figuring out how to leverage the distributed franchise dealership model to rapidly deploy charging stations across the country, Wall said. 

Building off of the amenities many dealerships currently offer, Wall said stores in some areas could capitalize on serving as a “destination charging” location. 

“Not every dealer is going to want to be in the restaurant business, but could that present an opportunity for a lunch spot, or some other destination opportunity? Maybe it’s retail or shopping in general,” he said. “This isn’t going to work for every dealer, but it has the potential to recast the conversation around the dealer itself and it can create some additional opportunities.” 

More change ahead

If the companies do opt for that destination charging model, it could certainly lead to more store renovations and remodels and boost what’s already been a positive sector for many construction companies like Triangle Associates. 

“The retail sector is way down for us, but automotive is the bright spot,” said Watt, who also thinks dealerships will change to react to different models and different needs of EV owners. 

“Everyone is being influenced by electric vehicles. They’re wanting charging stations out front for people to use when they come in to pick up things, or charging stations for the service areas and for cars on the lot. 

“It’s always been an evolving industry and always changing. Dealers change and adapt to customer demand.” 

To that end, stores might quickly need to evolve away from the traditional dealership layout with large parking lots for inventory. 

“I see the trend going to almost very small dealerships, since everything will get built online,” Watt said. 

Triangle Associates continues to carve out a niche in the sector and has worked on several projects in West Michigan and Chicago for Fox Motors and other dealership groups. 

The company is involved in a handful of dealership projects that are in the planning stages, including several driven by automaker-mandated store redesigns to reflect new brand standards. 

“(Dealerships) have not slowed down. They continue to grow and expand their business,” Watt said. “The market in general continues to be strong, and the pandemic hasn’t slowed that down. The pace of new car sales has slowed only by difficulty to get parts and pieces.” 

Constraints persist

According to the latest forecasts, analysts are betting that inventory constraints will continue to affect the industry for the foreseeable future.

S&P Global is in the process of revising its U.S. light vehicle sales forecast, which stands at 14.5 million units, Wall said, noting a likely downward revision given the slower-than-expected sales so far this year. The seasonally adjusted annual rate (SAAR) of new car sales hit 13.5 million units in July, which Wall said was a “recessionary level.” 

Forecast revisions will factor in supply chain pressures as well as macroeconomic factors that could cause consumers to back away from buying new vehicles. 

The near-term forecast is almost entirely driven by component availability, while concerns over the economy have yet to affect buying decisions, Wall said. He thinks macroeconomic factors have the potential to “flare up” and become an issue in 2023. 

“We’ll see growth in production this year, which is certainly a positive, but sales are going to be a challenge,” Wall said. “Finding a home for those parts in the right sequence is tough and then getting that to market is proving to be challenging. That’s going to continue even into next year. We still see that as being a headwind.” 

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