Kerrigan Advisors’ survey of OEM executives uncovers their views on profitability, days’ supply, and the agency sales model. - IMAGE: Pexels

Kerrigan Advisors’ survey of OEM executives uncovers their views on profitability, days’ supply, and the agency sales model.

IMAGE: Pexels

A strong dealer partnership is as essential to automotive sales as having skilled engineers designing vehicles and reliable production facilities building them. Dealers help OEMs create a loyal customer base and gain valuable referrals.

The pandemic began to transform this long-standing partnership, as online automotive sales proved a viable way to sell cars. Now, some industry professionals believe OEMs will shift their sales strategy and start selling vehicles directly to consumers through online channels.

No one really knows where OEMs are at in their trek to a new sales model; OEMs keep such strategies close to the vest, according to Erin Kerrigan, founder and managing director of Kerrigan Advisors. The aim of Kerrigan Advisors' first annual survey of OEM executives was to understand their perception of and their future plans for the franchise system.

“These are people who are in the know but are rarely surveyed,” she says. “We thought getting their perspectives on how they thought the industry would change would be pretty insightful.”

Turns out they were right. The buy-sell firm, well known for The Blue Sky Report, collected over 115 responses from OEM executives from December 2022 to May 2023 for this inaugural survey. Results depicted OEMs' outlook on dealer networks, profitability, inventory, and the agency model in the U.S.

“We learned OEM executive thoughts on how they believed vehicles would be retailed, days’ supply, and more,” she says. “People say a lot of things, but are they really going to happen? Are OEMs going to be more disciplined with production going forward?” 

OEM-Dealer Partnership

The Kerrigan survey results affirmed how much OEM executives value their dealer networks, even as the auto retail model evolves. 

Respondents indicated they view their dealers as partners in managing the industry’s evolution and see their customer-facing role as “critical to the automotive industry’s success,” reported “The Kerrigan OEM Survey 2023.” 

The survey discovered just 22% of OEM executives believe an agency model of auto sales will come to the U.S. in the next five years, while 43% remained unsure and 35% did not believe the model will materialize in the U.S. “The divergent responses may reflect the legal barriers OEMs face due to protections provided by robust state franchise laws, which limit OEMs’ ability to sell directly to consumers,” the survey report noted.

However, Kerrigan believes the data shows “we could see a change where there are more direct relations between the OEM and the dealer and the OEM and the consumer.” 

To illustrate her point, she cites executives responses to a question on who will own customer data in five years. Here, 68% of OEM executives believe customer relationship data will be owned by both the OEM and the dealer, and 16% believe the OEM will have exclusive ownership versus 17% who believed dealers would. 

“These responses make dealers a little skeptical of the OEMs plans for the future,” Kerrigan says. “All of a sudden OEMs are saying they want to own the customer data too and that they want dealers to share that information with them. This is why so many dealers are asking whether OEMs are trying to eventually sell direct to the consumer and crowd out the dealer.” 

Concerns also mount as the industry sees the direct-to-consumer model work with other manufacturers. Tesla, for example, already sells directly to consumers with remarkable success. “The Tesla model has intrigued every OEM executive,” she says. “It has called into question the legacy dealer network for some OEMs. European luxury brands, like Mercedes-Benz, are also successfully trialing the agency model in Europe.”

However, most OEMs, she says, also place a high premium on customer service, which is something franchise dealers do very well. Kerrigan says a shift to direct-to-consumer sales could put that at risk. “They risk customer relations not being where they need to be,” she says. “That’s why the dealer is so valuable to the OEM because they can make sure their customers get superb service.”

For this reason, any shift toward a direct-to-consumer or hybrid model is one that must keep customer service top of mind, adds Jessica Stafford, senior vice president of Consumer Solutions for Cox Automotive. “We hear almost annually a buzz on whether OEMs will move more toward a direct-to-consumer model,” she says. “Each time this comes up, there is speculation about what will and won’t happen. Manufacturers are eager to drive amazing customer experiences and work with their dealer networks to bring that to life.” 

Stafford points out Cox Automotive actively works with OEMs on their shopping experiences and how they partner with dealers to expose and merchandise both new and used inventory. “In my experience,” she says, “it’s the consumers' car-buying experience that OEMs are most interested in improving overall, not necessarily direct-to-consumer sales.” 

Predictions on Profitability

Auto retailer profit per unit remains strong despite high transaction prices and high interest rates, increasing manufacturer incentives, and improved vehicle supply. In fact, JD Power and LMC Automotive research shows dealers received $3,692 per new vehicle unit in June 2023, which is almost three times the margin in December 2019. 

And yet, the Kerrigan survey revealed that 69% of OEM executives expect dealership profitability to decline over the next 12 months, while 31% predicted profits would stay the same or increase. 

“Interestingly, these declines are not driven by a reversion to pre-Covid new car margins,” the survey report noted. Only a slim majority of OEM execs said they believed margins would return to pre-Covid levels, while 74% expect new car margins to settle between pre-Covid and current levels in the next 12 months and 16% projected high margins would continue through 2023. 

Still, margins will contract from some of the peak levels the industry has seen, according to Kerrigan, who attributes the shift to normalization of inventory levels.

In the survey, OEM executives reported higher inventory turn rates on dealers’ lots over the next 20 months, which will cause lower day’s supply. In fact, 59% of those surveyed project days’ supply to be 30 days in the next 12 months and just 3%project a rate of 90 days or more. 

“Most executives surveyed (61%) expect the ‘new normal’ for days' supply to settle in at 30 to 60 days, below the pre-Covid average of 60 to 90 days,” Kerrigan says.

Kerrigan believes this shift is a byproduct of the win-win model of the entire industry experience with supply and demand during the pandemic. “OEMs spent less on incentives, so they were making more money and dealers were able to hold prices because they had less supply,” she says. “The industry got very well-schooled on the benefits of supply meeting demand. Before the pandemic, we had ample supply, which resulted in discounting and tremendous incentive spending, and it was a less profitable business model. The industry has realized it’s more profitable not to oversupply the network.”

Of course, all bets are off with the Big Three striking in Detroit. At the onset of the strike, Ford reported around a two-month supply, Stellantis around a 100 days of supply, and GM around 46-51 days of supply. But those numbers won’t hold, and a loss of production could put upward pressure on prices, Kerrigan says.

Brian Finkelmeyer, senior director of new car solutions at Cox Automotive, agrees saying the strike will “slow production and may impact sales in the coming months.”

He writes in “The New-Vehicle Market Continues to Defy Gravity,” that “a strike will just be another obstacle that will help keep new car prices elevated, as supply shrinks in the face of strong demand. The automakers realize that a 15-million unit market is healthier than chasing 17-million units with excessive marketing costs and high incentives.”

Focus on Facilities

OEM responses came with one surprise, notes Kerrigan. Most OEM executives (52%) reported they believe facility requirements will remain largely the same over the next five years, while 32% noted they believe facility requirements will increase.

The reason these responses were surprising is that they contrast with OEM expectations that dealers will maintain less inventory and have less staff as the industry moves toward non-negotiable pricing. 

“Kerrigan Advisors believes these survey results are indicative of a business model that is in transition, with OEM views that are not always internally consistent and are evolving with the market,” the report noted. 

Kerrigan finds the results surprising as the industry pivots toward an electrified future. She says, “Electric vehicles do not require as much service, so facilities should be smaller. And if OEMs are going to become more agency oriented and implement less price negotiation, the dealers will not require as much staff. Also, if there is less inventory, to me, that points to an industry that would require less brick-and-mortar investment.”

When these trends are combined with OEM executives' thoughts on profitability, customer data, facilities and days' supply, the survey results show OEMs recognize the critical role of dealers in the auto retail space, Kerrigan adds.

“While OEMs and dealers have differing perspectives on the path for electric vehicles, consumer data and facility requirements, mostly OEMs expect the dealer to remain a profitable piece of the auto retail puzzle,” the report concludes. 

Kerrigan stresses the results show the OEM/dealer relationship will continue to evolve but highlight that “the relationship is on solid ground and well positioned to manage the evolution of U.S. auto retail.”