By: Talon Fee, Managing Director at Dave Cantin Group
Last week, Dave Cantin Group Chief Business Officer Brian Gordon posted a blog highlighting the strategic industry insights dealers can obtain by studying retail automotive public company earnings. These public companies have access to mountains of data and have teams of analysts who find trends, develop projections, and effectively lay out information for market analysts and shareholders.
During the Q&A portion of Lithia and Driveway’s Q3 2024 earnings webcast, CEO Bryan DeBoer answered a key question from Wells Fargo’s Colin Langan. DeBoer’s response incorporated two critical topics in retail automotive: The reliance on profits generated from fixed operations and the continued increase in battery electric and hybrid electric vehicles in operation. With gross profits from new and used sales declining from their Covid peaks … or leveling at a new normal, fixed operations have separated the financial performance for dealers in 2024. The figure below has been generated from the recent Q3 2024 earnings reports released by the publicly traded retail automotive companies, showing just how important this part of the business has become to overall profitability.
This blog focuses on the intersection of fixed operations and electric vehicles and highlights why dealers should not be worried about electric vehicles/drivetrains adversely impacting this critical business segment. In fact, the opposite is true, and dealers should proactively embrace opportunities to invest in tools, technology and training related to servicing electric vehicles.
EV Growth Continues
Based on reporting from CBT News last month, 2024 is the first time the U.S. Electric Vehicle market surpassed the 100,000-unit mark for the sixth consecutive month, representing over 9% of the total market. That number jumps over 22% when considering Hybrid Plug-Ins and Hybrids. While this year’s narrative has focused on slowing EV demand, the facts show that electric vehicle sales and market share continue to increase (albeit not as fast as originally projected). While manufacturer incentives and government subsidies have buoyed EV sales, there is little reason to believe that the overall electric market will not continue to grow, even despite the recent red wave that included a Trump victory, a Republican Senate majority and, at publish time, a likely Republican majority in the House of Representatives. The pace of growth may ebb and flow based on politics and regulations, but over a decades long view, there will be growth.
Even with cutbacks in volume goals and manufacturing plans, brands have continued to make substantial investments in sustainable vehicles over the past year. Positive EV news has been consistent in manufacturer Q3 earnings reports and forward-looking statements from companies like Tesla and GM, showing no signs of slowing investments for some key players in the sustainable vehicle market. Another DCG blog outlines why EV growth will continue, while DCG has been quoted in the media assuring the industry that EVs will be just fine.
EV Fixed Ops – A New Customer Retention Opportunity
Conventional thinking has told dealers that the arrival of electric vehicles at scale would make it difficult for them to sustain performance in fixed operations.
Parts and services related to routine engine-related maintenance like oil and filter changes have been a key area for dealers to engage with customers consistently and drive retention to the key profit center of fixed ops. The oil change leads to multi-point inspections, which invariably leads to more business. Electric vehicles do not require any engine-related service, specifically the habitual oil change, so questions swirl in dealers’ minds: what’s there to service and how will we get customers into the service department regularly without that hook?
Electric vehicles represent a better opportunity than ICE vehicles, especially over the next 5-10 years, while the technology remains relatively new. Let’s look at just three of these reasons:
Technology Always Needs Fixing (and consumers don’t trust themselves)
New technology doesn’t always operate as it should and constantly requires updates and replacement parts. Just think about our smart phones and computers; they require constant software updates, new parts, accessories, and subscriptions to get the most out of them, and they (or their parts) tend to wear out or decline every few years. Beyond this, we are still far too early in the data set to understand the impact of aging and deteriorating batteries on fixed operations.
EVs aren’t any different, and consumers don’t want to screw them up…enter the dealer. Consumers would prefer to bring their high-tech vehicle to a certified and licensed dealer of their specific brand (or have the dealer send a service tech to them) to perform even the easiest tasks like software updates, providing new consumer retention and upselling opportunities.
White Space for Dealers
For now, dealers have a virtual monopoly on parts and service for electric vehicles, which can’t be said for ICE vehicles. There are no Jiffy Lube equivalents, local mechanics, or third-party parts. The pace of technological change and the lack of consistent operating systems and parts will carve a huge moat around the aftersales business for dealers who compete now for service against third-party businesses.
Additionally, over the past 100+ years, consumers have gotten to know their ice vehicles well; many have even made a hobby out of fixing them. BEV owners are different; driving is more functional, and there’s no engine to fuss over, so strike DIY from the competitive mix. The only place BEV consumers can go for help is to their dealer, leading to the ultimate customer retention opportunity for fixed operations.
Warranty Gravy Train
As we’ve stated, new products and technology are far from perfect. There are significant challenges with electric vehicles covered by manufacturer warranty, problems the customer is sent to their dealer to fix. This work costs the consumer nothing and again provides the opportunity to engage the customer and provide additional services when they come to the dealership. Glitches and problems are just part of technology, and electric vehicles will likely always have these in greater numbers than ICE vehicles, creating an ongoing opportunity for fixed operations.
The Bottom Line – Fixed Operations Gross Profit Growth
In the current environment, parts and labor sales are among the highest margin selling opportunities afforded to franchised dealers, approximately 65% and 30%, respectively, according to Lithia’s CEO, Bryan DeBoer, on the Q3 2024 company earnings call.
As early data rolls, it’s clear that service work for electric vehicles represents a tailwind in dealer aftersales business. Lithia’s DeBoer defines much of the repair work for EVs as “repair and replace,” meaning that rather than diagnosing and fixing an issue with an engine or transmission, for example, technicians will spend much more of their time identifying faulty components, removing them, and replacing them with OEM parts. Given the technological nature of these components, price tags on these repairs will continue to grow and the average repair bill will have a larger cost associated with parts than it will labor. This may result in some downward pressure on margins (since parts are typically lower margin than labor). However, the increased repair cost and updated pricing models for easier repair and replacement work will offset this. That increase in total cost will result in elevated gross profit opportunities for dealers, on both warranty work as well as customer pay.
This point is demonstrated by the Q3 2024 earnings presentation released by Asbury Automotive Group. On slide 14 of its investor presentation (see below), Asbury Automotive shares that its average $ per RO for BEVs was $865 and $629 per RO for PHEVs. Both figures are significantly higher than their $517 average per RO for ICE and Hybrid vehicles. While BEV and PHEV each currently represent just 1% of their total RO count, those figures will grow exponentially in coming years somewhat in line with their EV UIO.
In the trailing twelve months, Asbury’s franchised dealerships have completed 3.1 million Repair Orders. Assuming the 1% penetration is accurate for the trailing twelve months, the figures below represent an estimate of total Fixed Operations Revenue attributed to BEV and PHEV. Please note, the figures below are purely estimates based on Asbury’s most recent investor presentation, they do not represent actual reported financial data.
Conclusion
The takeaway is simple. Electric vehicles represent a significant opportunity for dealers willing to innovate their business and see the opportunity (rather than just risk) in the changing automotive landscape. There are clear reasons why BEVs present not only greater fixed operations revenue, but a chance to reset the way dealers engage with their customers – without any competition (at least for now). EVs aren’t going anywhere, so lean in, invest and build a moat around your new EV customers.
M&A Advisors Are Critical
True advisors like the Dave Cantin Group focus on far more than blue sky multiples and valuations. Understanding all the dynamics impacting the industry (like EV’s impact on aftersales) is just part of what sets DCG apart and makes us an invaluable resource for dealers all year round. Dave Cantin Group has invested significant capital over the past 12 months to develop tools and resources to ensure that we can provide industry-leading insights to our clients, whether they are focused on an immediate buy/sell opportunity or not.
This year, DCG introduced Jump IQ, a new proprietary AI-powered machine learning platform that gives us access to financial information, key performance factors, custom multiples, and valuation estimates for every dealership in the U.S. For example, Jump IQ leverages over 20 factors to develop customized multiples for each dealership considering the unique scenarios impacting M&A that we discussed above.
Also, in January of this year, DCG introduced the Market Outlook Report, published in partnership with Kaiser Associates, which shares the most critical themes that will impact the retail automotive industry. No matter where you are on your journey of operating or buying and selling dealerships, this report shares insights that can be invaluable as you make decisions and set a strategic direction for the months and years to come. In August, we released the midyear update.
The DCG team is here to provide expert guidance and support if you’re considering or actively pursuing an acquisition or sale or looking for other advisory support. Contact us to talk to one of our automotive M&A specialists.